Option Pain – Not that great, but worth a look.

 

Option Pain causes stock prices to fluctuate around the option pain level. This means that if stock prices are currently above their option pain levels (let’s call this PAIN), then the big boys will somehow force stocks to trade lower.

- this was taken from https://files.nyu.edu/bk940/public/index.html (my website for a school project)

If stocks are trading below PAIN, then this presents a good buying opportunity.

Examples of option pain…
MGM was trading at $11.75 on the Wednesday before the Feb option expiration day. On expiration day, the stock opened at 10.65 and traded upwards, closing near the option pain level of $11. See below for the Option Pain level (it is the level with the least options sold).
Observe that during OPTION Expiration week, when the stocks prices are above the PAIN, the manipulators try to pressure the price downwards. There are many examples of Option Pain.

See how MGM stock traded downwards and fluctuated around its option pain at $11.

Here's another one.

Guess where JPM traded at option expiration day?
ANS: $40!

What is option pain…

Option pain is a theory that Option Sellers would want their Options to expire worthless, killing the Option Buyers. Stocks would hover around the Option Pain level, which is the value that would give the most losses to Option Buyers. 

The theory suggests that Option Sellers have high control over the market as they are usually the BIG BOYS a.k.a  HEDGE FUNDS, INSTITUTIONAL traders and BANKS. This is why they are able to manipulate the market.

So what's the trade? How do I use option pain?

Before option expiration week (usually the 3rd week of each month), look for the option pain value of stocks using optionpain.com, if stocks are trading above the option pain value, don't buy them. If stocks are trading below the option pain value, buy them!

Does this really work?

Option pain is just one of many theories. It may not work 100% of the time. However, it does give one an upper edge. At least, one is able to ride stock rallies with the big boys, who will usually drive stocks upwards towards the option pain level.

Do remember that market fundamentals may disrupt the option pain theory. For example, the abrupt weakness in the markets that unravel itself in early MAY 2010, caused all option pain level to be distorted at a high price. Stocks would still continue its dive downwards despite the OPTION PAIN being higher that their prices at that time.

It is very important to understand that the market fundamentals can distort OPTION PAIN level.. Especially abrupt changes in market sentiment.

This is why it is also important to learn about the MARKET CYCLE